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Home My WebLink About0563.093GJ, , . . "'~" ,,:- November 18, 1993 THE HONORABLE CITY COUNCIL Palo Alto, California Attention: Finance COmDittee BPonJIQ sOUTH U'IlIo. SUCTIONS, FROM XHYESTXDIT ROLley Members ot the council: '.-port ip ari.e 3 The current City of Palo Alto statement of Investment Policy prohibits investments in firms which do business yith South Africa~ Now that the African National Congress recommends lifting the sanctions, staff is submitting a recommendation to remove this restriction fro. the Investment Policy. Staff recommends that this item be referred to the Finance committee. The city of Palo Alto statement of Investment Policy (CMR:276:93, stipulates that, CMR:563:93 "The city of Palo Alto j.s prohibited from depositing, investing, or using city funds with banks, financial institutions, investment firms, or other investment type organizations who do business .. ith either the public or private sector of South Africa so long as apartheid is the of£icial policy ot this country. Staff .. ill retur-n with a recommenda tion to amend or remove the restrictions in the Statement of Investment Policy if the President suspends or modifies the United states sanctions, and the actions taken by the Government of South Africa are SUfficient for the African National conqress to recommend lifting the sanctions~· , , ',-:' ,', , . The Investment Policy was last adopted by the city council ~n June 23, 1993. President Bush suspended the United states sanctions in 1991. and Nelson Mandela, President of the African National Congress, recommended lifting the sanctions on September 24, 1993. According to the South African Consulate-General's effice in Beverly Hills, the aqencies shown on Attachment A have repealed sanctions. The Counties of Alameda and Contra Costa voted to suspend their anti-apartheid ordinances if they are satisfied with progress on elections. The Investor Responsibility Research Center (IRRC) in Washinqton O. C. has also been tracking reactions to the South Africa situation. Accordinq to their representative, the reaction to Nelson Mandelafs recommendation to lift the sanctions varies frolD; one area to another ~ Some agencies are doing more than lifting sanctions~ The State of Massa~husetts is encouraging a code of conduct.. They will give preference in investments and purchases to organizations which tollow their code of conduct in regards to south A.frica. The code of conduct addresses e.ploy.ent principles which uphold workers' rights,. includinq the right to organize and barqain collectively and. guiding principles whiCh include that investments will create jobs and education p~oqra.s tor ¥Orker6~ The City of New ¥ork is considering the purchasa of South African bonds. The City of Oakland is decidinq whether to suspend for six months its current policy regarding restrictions on purcbases and investments with f irJQs doing business in South Africa. lap.at D~ Lifting 'be aanotiop The impact of the City's SOuth Africa policy has been on short-term securities such as commercial Paper and Bankers Acceptances. There has been no impact on the Local Agency Investment Fund, Certifi cates of Deposit, U.S. Treasury, or u.s. Agency investments. Durinq the last few years,. staff has attempted to purchase both commercial Paper and Bankers Acceptances, but has been able to deal only with the few firms which have responded to our South Africa policy. This has forced staff to invest short-term funas in Certificates of Deposit. During the last tew years, the yield on the Certificates of Dep?sit has been approximately the same as the yield on Commercial Paper and Bankers Acceptances.. Thus, while the South Africa policy has increased the difticulty of placing funds and reduced the ability of staft to diversify the portfolio, there has been little loss in earnings. CMR:56J.:93 2 "-. \ In order to measure tha theoretical difference of potential earnings, staff looked at August 199), when both Certificates of Deposit and commercial Paper were purchased. The Certificates of Deposit produced a .08 percent lower return. Based on this variatio~, the increase in earnings would be $800 per 7ear per $1 .i1110n investet!. Thus, staff ~stimates that only about $10 million 'Would have been invested ~ifferf!ntly, and the difference in potential earnings for the entire $186 million portfolio is less than $10,000 per year. If the South Africa restriction is removed, staff anticipates plaCing more funds in Commercial Paper and Bankers Acceptances. This will be even more important durinq the next few months, as staff places short-term investments to correspond with cash needs~ Staff will naed to carefully handle the short-term cash of the City durinq the ~tility refund, since there will be a substantial drop in cash receipts in early 1994~ ae.,,..pdation Statf recommends that the council approve the attached Statement of Investment Policy, which will remove the paragraph prohibiting investments in firas which do business in SQuth Africa as shown on page 3 of AttaChment B~ Respectfully submitted, //~/7ff~ CMR:S63:93 CMR 148 91 CMR 252 91 CMR 276 93 3 llTTllCllllZm' II The followinq agencies have repealed their sanctions: The states of: Colorado connecticut Massachusetts Michigan Virqinil! Wisconsin The cities of: Austin, TX Baltimore, Me BerklP!ley, CA Boston, MA Bur!inqtol"l, VT Dallas, TX cine inna t i , OH Lincoln, HE Los Anqeles, Co'. Grand Rapids., HI Gainesville, FL Hartford, CT Kansas City, MO Hew York, NY Richmond, CA sacramento, CA San Jose, CA Santa Barbara, CA Santa Monica, CA Seattle, WA St. Paul, MN Tallahassee, FL Takoma Park, MD Toledo, OH Tuscon: AZ University City, MO West Hollywood. CA and Washington, D.C. The counties of; Dade, FL Howard, NO Jackson, MO Monroe, NY Santa Barbara, CA Santa Clara, CA Sonoma, CA Tompkins, NY. CMR:563:93 • .~-:~.' -c A TTACIIIElIT 8 CITY OF PALO ALTO Statement of Investment Policy INTBODUc:!'ION As a charter city. Palo Alto operates its pooled idle cash investment~ under the prudent investor rule and in conformance ~ith California law~ Investments are made with the judgement and care, unde.r the circumstances then prevailing, ...... hich investors with prudence, discretion, and intelligence would make considering the safety of their capital as well as probable income. This afforas the Ci~y a broad spectrum of investment opportunities, so long as t~e invest~~nt is deemed prudent and is allo~able under current legislation of the state of California and the charter of the City of Palo ~lto. Palo Alto strives to roaintain the level of investnent of all idle funds as near 100 percent as possible. through daily and projected cash flow determinations~ Investments are made so that maturities match or precede cash needs of the citY4 PHILOSOPHY The basic premise underlying Palo Alto's investment philosophy is to insure that sUfficient money is al'Ways available to Ir'.eet current expenditures. The City is able to take advantage of the rel~tively large reserve bala.nces maintained by its utilities, 'Which allolol it to take advantage of the general tendency of the market to provide a higher return for longer-term investments (known as liquidity preference). Up to 20 percent of the portfolio may be in investments maturing in :more than five years. consequently, in the long run, the city should average a higher total return than most cities without such reserves to invest. The economy, the money markets, and various financial institutions (such as the Federal Reserve system) are monitored carefully to assess the probable course of interest rates4 In a market ~ith increasing interest rates, the city will tend to invest new cash in securities 'With relatively shorter maturities~ This will allow the funds to be ava.ilable for other investments .. hen t.he interest rates are. higher~ 1 ~VTHORIZEp I~VESTMF.NT PERSON~ Idle cash rnanagelIlent and investment transactions are the responsibility of the Finance Oepartment. The Department of Finance is under the control of the Director of Finance, who is accountable to the city Han~ger~ The department is composed of the divisions of Administration, Accounting, Treasury. Budget, Purchasing. and Real Estate, as set forth in sections 2~Oa.laO through 2.08.190 of the Palo Alto ~unicipal Code. The Treasury Division is under the super'Visiun of a Treasury Manager, who is accountable to the Director of Finance. The duties of the Treasury Manager include managing the City's portfolio of treasury investment6-, remaining accountable for the City's treasury balance, developing and ~onitoring the Ci~y's cash flow ~odel and developing long-term revenue and financing strategies and torecasts~ A Financial Analyst reports to the Treasury Manager. The Financial Analyst assists the Treasury Manager in the purchase and sale of securities~ The Financial Analyst also prepares the monthly report, and daily records all investment transactions as to the type of investment, amount, yield, and :maturjty.. Cash flow projections are prepared as needed~ The Director of Finance or designee is authoriZed to make all investlnent transactions allo'Wed by the Statement of Investment Policy~ He or she may authorize the Treasury Manager or Financial Analyst to enter into investments within clearly specified parameters. In all circunstances approval from the Director of Finance is required before selling securities from the Ci~y's portfolio. The Treasury Manager may also transfer no more than $3 million in a day from the City's general account to anyone financial institution, without the prior approval of the Director of Finance. The Financial Analyst may transfe~ up to $1 million between the City's qeneral account, the Local Agency Investment Fund (LAIF) and any approved Dutual fund in any day~ No other person has authority to make investment transactions without the written authority of the Finance Director. ,.+,1· , 2 , . ,-. '" -~ ~~: "j ,~':,!·f; ...... l'YP~S OF INVESTMENT Investments are limited to the followirlg media! 1. Securities of the U.S. Government, or its agencies 2. Certificates of Deposit (or time Deposits) {CD) 3. Neqotiable Certificates of Deposit (NCO) 4. Banker's Acceptance Notes (SA) 5, Commercial Paper 6, Loc~l Agency InVestment Fund (LAIF} 7. Short-term Repurchase Agreeme~ts (REPO) 8. City of Palo Alto Bonds 9. Money Market Accountsj and 10. Mutual Funds which are limited essentially to the above investments and further defined in note 9 of Appendix A. Appendix A provide3 3 more detailed description of each investment vehicle and its security and liquidity features. Most of the City's short-term investments 'Will be in securities .... hich pay principal upon matur-ity, wh1le long-term investments may he in securities which periodically repay principal as well as interest. Most of the City's investments ~ill be at a fixed rate. However, some of the investments may be at a variable rate. 'i'l'te eit.~ ef---.p.a-le Al4::e is fl~ehilli-'e:ed--..fFelR ae~esi~il'llJ. if\: es\:iFlIj', 6:!' 1:J:sif'l~ eit.y fltlJ'las .i1:6 l!a~t:s, fi'AaJ'leial i",s~it-lt:I~iBf1S. -iAYes:t~ :tinse, SF' e1=t:t_f' in.est:mef'lt-t-}'1!Ie Bf"g'anieat.isflS-wfte---.o-e l'lU:siPte:Sls .itlt ei"t.fte!' t.he publie ei! p~i. a"&e seet.BP of-----&&u"e)t Af!'iea S6 lang as apar-.t.fleie is ~Re: effieial m_pe-l4ey sf e.Ris eel::ln'et'). Stoat-! r ... il.~ ret:'tlrf'l • i4::fl a ~eeelMftendat:i:ePl t-e amefui Sf" t'eftl::J, e '''s l"e:9~l!"iet:ie:A9 in 1;fi£ St.at.el1lePi't: af !PI .. es't:. aRt. -Peli e~ if 'tbe P1"es iliefl1: 09 It:ls"efuis eF medifies EftS gRit-ea St-atoes s3f'letief!9, fd'Ui "the aet-ielis "t:a]t:e:R ey~ seve'f'J1fI:eFl'E e:f £fHf-th. ...... fyiea at e stiffieiefl1: t(ff-~-fte.--A:fJ:'ieaA l'Iatieflal Safl:~ress t-o 'f'ees1MIepui lif*ciflg the----~-i-efl..s.-,. INVtSTMENT CRITERIA criteria for selecting investments are (in order of importance): 1. Safety, 2. Liquidity, and 3. Yield. Use of Brokers and D~ale~§ The Finance Department maintains a list of acceptable brokers and dealers. Any broker or dealer must have at least three years experience operating with California municipalities. maintain an inventory of trading securities of at least $10 million, and be 3 approved br the Fir.ance Director before being added to the city's list of apptoved brokers and dealers. A broker or dealer ~ill be removed from the list should there develop a history of problems, {i.e., fail to deliver securities as promised, failure to honor transactions as quoted, or failure to provide r-easonable information). Review and Reporting on Inves.tments Monthly, the Finance Department will review performanc~ in relation to the Council-Qdoptea policy. Monthly, the Department will report to the Council, in a manner approved by the council, its performance in relation to this policy and explain any deviation from the policy and recommendations for changes, if any. The council will review this policy annually as part of the Budqet Process. All changes in policy must be approved by the Council prior to implementation. snecific Investment Strategy Dependinq upon the City'S financial situation and conditions in the money markets, the investment strategy ~ill change to achieve the appropriate balance of safety, liquidity and yield. safety o No mo~e than 10 percent of the portfolio in collatera lized CDs of any institution. An institution must be federally insured; and -Have been in op~ration for at least three years, ~ith positive earnings for at least three of the past four q1larters of operation; and -Report equity in excess of 3 per~ent of assets; and -Report scheduled items not in excess of 1.5 percent of assets~ o No more than 30 percent of the portfolio in negotiable CDs. -No more than $2 million with anyone institution. -No neqotiable CDs with maturities b~yond 90 days. -An institution must meet the same safety tests as collateralized CDs. 4 o No ~cre than 30\ of the portfolio in Sanker's Acceptance Notes. No more than $5 ~illicn with any one ~nstitution. c No more than 15 percent of the portfolio in Commercial Paper. No more than $3 million with anyone institution_ o t,imit investments exclusively to those stipulated under types of investments (specifically, there will be no investments involving Reverse Purchase Agreements) . o No new Farm credit securities. o No more than 2 percent of the portfolio in the G~aranteed Portion of Small Business Administration Notes. o No more than 15 percent of portfolio in Mutual Funds. o No more than lO percent of portfolio in callable agency securitie$~ Liquidity Any investment must be evaluated on its m2rket rate and interest rate riSK. If the security must be liquidated, it may have a small market and need to be sold at a loss, and if interest rates increase, the value ot an investment may go down. The market rate risk is very low for u.s. agencies and BAs since there is an active market in these securities. It is more difficult to find a purchaser of NCPs or cor~ercial paper, and ~ost CDs cannot be liquidated without a substantial loss of interest. Usually, the longer term the investment the larger degree of interest rate risk. If inte~est rates increase, it is likely that the. long-term investments would decrease in value. This is primarily a factor for securities ..... hich have maturities in excess of two years. Since almost all of the in'/estments held by the City of Palo Alto with maturities in excess of two years are U .. S. government securities, it is possible to maintain fairly accurate records on the market value of these securities and sho~ the market value and potential loss to interest rate risk. This risk is a part of all long-term investment portfolios and does not become an important factor unless there is a need for the cash, and the loss {if any) must be realized. The following are liquidity constraints: o Liqyidity enough to meet one month~s cash needs. o At least $50 million maturing in less than 2 years. 5 " J .mt;r:;:'":>:~-:;/· . .: o o No more than 20 percent of the portfolio shall be in investments maturing in more than five years. Any sEcurity purchased with a maturity greater than 10 years may pay principal as .... ell as interest on a periodic basis. o Market value of the portfolio will exceed 95 percent of the cost basis of the port~olio. Should the ratio fall below 95 percent the Finance Department will restrict future invastments to those matu:.:-ing in one year or less and/or liquidate securities as deemEd financially pru-dent until the ratio is achieved. o Commitments to purch~se new securities shall be made no more than three (3) ~orkinq days before pricing. Yield, which is defined as the return on an investment, will be the third criteria fo~ investments~ after safety and liqUidity. Whenever possible, the city ~ill obtain three or more bids on the purchase or sale of securities and ta);;e the higher yield on purchase or higher price on sale. This rule will not apply to ney issues which are purchased at market no more than three (3) working days before pricing, LAtFI city of palo Alto bondS, money market accounts or mutual tunds, which shall be evaluated separatelY4 Adopted by City Council October 22, 1984. Monthly reporting effective January 1985. Amended and Adopted by city Council June 24, 1985. Amended by City Council December 2~ 1985. Amended DY City Council June 23, 1986. Amended by City Council June 22, 1987. Amended by City Council August 8, ~988 Amended by City council November 28, 1988. Amended by City Council June 26, 1989. Amended by City Council May ~4, 1990. Amended by City Council June 24, 1991. AlIlended by city Council June 22, 1992. Amended by City Council June 23, 1993. 6 -- APPENDIX ~_ EXPLANATION OF ALLOWABLE INVESTMENTS 1. U.S. Government Agency ___ .§~c::urities. U.S. Government Agency Obligations include the securities of the Federal National Mortgage Association (FNMA). Federal Land BanJcs (FLB), Federal Intermediate credit S~nk.s (FrCB)# Banks for cooperatives, Federal Home Loan Banks (FHLB). Government National Mortgage Association (CNMA), Fed.eral Home Loan Mortgage corporation (FHl.JoIC). student Loan Marketing Association (SLMA) # Small Business Administration {SSA) and Tennessee Valley Authority (TVA~. Federal Agency securities are debt obligations that essentially result trom lending programs of the Government. Federal agency securities differ from other types of securities as .... ell as among theItl.selves~ Their characteristics depend on the issuing ngency. It is possible to distinguish three types of issues: (A) perticipation certificates (pooled securities), (B) certificate of Interest (pooled loans), (C) notes, bonds, and debentures. The ~ecurities af a few agencies are explicitly backed by the full faith and credit of the U. s. Goverllment. All issues, however, have de facto backing from the federal government, and it is highly unlikely that the government would let any agency def2lul t on its obligations. 2. Certificates of Oe-p_osit. A cez:tificate of Dep<?sit {COl is a receipt for funds deposited l.n a bank, savlngs ):lank, or savings and loan association for a specified period of time at a specified rate of interest. Denominations are $100,000 and up. The first $100,000 of a Certific::ate of Deposit is guaranteed by the Federal Deposit Insurance corporation (FDIC) if the deposit is with a bank or savings Dank, or the Savings Association Insurance Fund (SAIF) if the deposit is with a savings and loan. CDs with a face value in excess of $100,000 can be collateralized by u.s. Government ~gency and Treasury Department securities or first mortgage loans. Govermnent sec~rities must be at least 110 percent of the face value of the CD collateralized in excess ot the first $100~OOO~ The valu~ of first mortgages must be at least 150 percent of the face value of the CD balance insured i~ excess of the first $100,000. Generally, CDs are issued for more than 30 days and the ~aturity can be selected by the purchaser. 3. Negotiable c:ertlficate of Oeoonsitn,,--Negotiable Certificates of Deposit (NCDs) are usually supported only by the strength of the issuinq institution, but can be sold at any time and thus provide liquidity. 4. Bankers' i\cceptaJl~~ A Banke.r's Acceptance is a negotiable time draft or bill of ex<..:hange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually created to finance the ;." import and export of goods; the shipment united states and stora9~ of readily commodities. <. of goods ~ithin the marketable staple In over 70 years of usage in the united States, there has been nQ known instance of principal loss to any investor in BAs. In addition to the 9uarantee by the accepting bank I the transaction is identified -.with a specific commodity. Warehouse receipts verify that the pledged commodities exist, and# by definition, these commodities are readily marketable. The sale of the underlying goods generates the necessary funds to liquidate the indebtedness, BAs enjoy Jr.arke.tability since the Federal Reserve Bank is authorized to buy and sell prime BAs ~ith maturities of up to nine months4 The Federal Reserve Bank enters into repurchase agreements in the normal course of open market operations ~ith SA dealers. BAs are sold at a discount from par~ An acceptance is tied to a specifiC loan transaction; therefore~ the amount and maturity of the acceptanc~ is fixed. 5~ Commercial pap~ Commercial paper notes are unsecured promissory notes of industrial corporations, utilities, and bank holding companies. Interest is discounted from par and calculated using actual number of days on a 360-day year. The notes are in bearer form with maturities from one to 270 days selected by the purchaser, and denominations generally start at $100,000. There is a small secondary market for commercial paper notes and an investor may sell a note prior to maturity. Commercial paper notes are backed by unused lines of credit from major banks. Some issuer's notes are ins~red whiIe some are backed hy irrevocable letters of credit from major banks. state lao.., li~its a City to investments in United States corpora'c':'ons ha"ring assets in excess of five hundred million dollars 'With al: "A"' or higher rating for the issuer's debentures. Cities may not invest more than 30 percent of idle cash jn commercial paper. 6 ~ J.ocal Ager.cy Investment FUnd Demand DePQ.§..i..t..... The Local Agency Investment Fund (LAIF) ~as established by the state to enable treasurers to place funds in a pool for investments. The City is limited to an investment of the amount allowed by IAIF (currently $15 million). LAIF has been particularly beneficial to those jurisdictions with small portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield. 7~ Repurchase Agreements. A Repurchase Agreement (REPOS) is not a security, but a contractual arrangement between a financial ,